02/05/10 Baltimore, Maryland – Last August, it was reported that deflation in Japan had reached a new record. Prices were dropping at the fastest pace 38 years. By November, it was duration, rather than depth, that got the press’s attention. Prices had been going down for 10 months in a row. Then, last week an update:
“Japan Deflation Hits a Record Pace,” reported the BBC. Prices in Japan were falling faster than they ever had since they began keeping track in 1970. The tide has gone out so far; beachcombers can’t remember when there was so much beach to comb. But what follows is not offered as a prediction, but only out of curiosity. We don’t know how this will turn out. Could it end in hyperinflation? Maybe.
Prices fall in Japan. The yen rises. And the government uses every trick in the book – and some as yet unpublished – to knock it down. If you are in a position to borrow money from the central bank, the bankers will give it to you at practically zero interest. And if your neighborhood wants a bridge or a community center, that too will be forthcoming from the Japanese government. No government has ever been so generous. At least, not without going broke. For every yen the government squeezes from its taxpayers, it returns more than 2 yen in public spending.
Investors must think the trend is eternal. Or perhaps they don’t think at all. They lend money to the world’s most spendthrift major government for 10 years in exchange for a yield of only 1.310%.
The drama of this story is an old and familiar one. Deeply flawed heroes at the world’s central banks and treasury departments think they can do a better job of guiding the economy than the markets themselves. It is they who set the price for short-term money, for example, not willing borrowers and lenders. They are the ones who fight the correction every inch of the way. They are also the ones you don’t want to stand behind; every shot they take backfires.
In France, the savings rate, as percentage of revenue, has gone up for the last 16 months, to 17% – the highest rate in 27 years. This comes as the Sarkozy government follows the lead of the US and Japan, with a deficit of about 8%…compared to 10% in the US and even higher in Japan. This is not the first time this has happened in France. The previous savings rate peak came when the Mitterrand government was trying to stimulate the economy out of the slump of the early ’80s. The more the government tries to stimulate spending by running deficits, the more people try to protect themselves by saving.
While the drama continues throughout the world, the story is most advanced in Japan. Which is to say, the central bankers have gotten themselves into deeper trouble. Martin Wolf of The Financial Times and Richard Koo of Nomura Securities applaud their performance. But by trying to suppress a correction in the private sector, Japan’s central bankers have stretched out a slump over two decades and set up the nation for a bigger crisis in the public sector. And there is nothing they can do about it. Their fiscal stimulus no longer stimulates. Their monetary inflation no longer inflates. And every quack cure they offer brings the patient closer to the grave. You might think they’d give up. Instead, they increase the dosage. Fiscal stimulus hits a new record, right along with deflation.
But it’s the final act that interests us. With public debt at nearly 200% of GDP and 700% of tax revenues, we shouldn’t have to wait much longer. Given the track record, we have to assume that it will be the exact opposite of what central bankers expect. They are aiming for the whimper of newborn growth. More likely, they will get the bang of hyperinflation.
The Japanese were recently among the champion savers of the world. Directly or indirectly, these savings financed the government’s stimulus efforts. Banks, pension plans, insurance companies – all bought government bonds as a safe way to store wealth. The government then drew upon this stored up wealth to finance its bridges to nowhere and its other boondoggles. The result is a misunderstanding on its way to becoming a disaster. The typical Japanese person looks forward to his retirement with a mountain of savings in his backyard. He believes he still has his cake. The government, however, has eaten it.
Higher savings rates typically produce lower prices, for a while. Currencies rise. Even in Weimar Germany, there was a period in 1920 when the mark rose. Falling prices would seem to be proof that the money is still there. But the real money is gone. Then, suddenly, people notice that their savings are nothing but paper. The tide turns. Confidence disappears. The big wave of accumulated savings hits the marketplace like a tsunami. Desperate people try to get rid of paper. They want something solid to hold onto. Long-term bonds, the most vulnerable to inflation, are exchanged for cash. Cash and government securities flood the market. Prices soar. Middle-class savers drown. Meek debtors, relieved of their burdens in the flood, inherit the world. So do the arrogant debtors in the government. And the shrewd speculators. And then central bankers return to their desks and come up with a new plan.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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This link is a well written time-line regarding the impact of the dollar dying on a few American families. It is an on going saga still being added to weekly. Start reading it and you’ll be hooked. Check it out:
http://johngaltfla.com/blog3/2009/11/18/
“A system predicated upon fraud isn’t sustainable. A clearing and settlement system that facilitates counterfeiting and fraud, and is accountable to nobody, isn’t a clearing and settlement system. A media that only touts the party line isn’t a free press. A private cartel of banks, writing trillions of dollars of taxpayer-funded checks while refusing to tell anyone who is receiving the loot isn’t a sustainable banking system. A government that allows all the above to become the status quo, and which twists statistics in order to lie to its own citizenry as well as the rest of the world, isn’t a sustainable government.”
Extremely interesting observation by Mr. Bonner. Maybe a long time ago the Japanese, with zero population growth, a blown bubble economy and a high savings rate, should have, maybe, embraced deflation? Cheers.
Great stuff, Neo-Feudal.
I believe Mr. Bonner is correct. Hyperinflation is baked in the cake for Japan. Which in turn, will arrive like a Tsunami to the shores of the U.S. There is a day of reckoning coming…….soon.
Question for the board:
When Bill says, “Then, suddenly, people notice that their savings are nothing but paper.”
What is the mechanism by which people suddenly “notice” that their savings are nothing but paper?
Just trying to understand.
Japanese stocks were recently recommended by Daily Reckoning as a good contrarian buy for the decade because of their low share prices. Does this still hold true considering the content of this article?
I believe prices would have to move up first before the John Doe of Japan wants to get rid of his savings. I don’t see this right now. But when it does come things could move quite fast.
The global economy is still very fragile. Any spike in interest rates will throw us back into another deep recession. Only when consumers, businesses and government balance sheets are strengthen, will we return to any sustainable growth. As we have seen in Japan, deflation is here to stay.